Connect with IPI

Receive news, research, and updates

Tax and Loot Policies

The Cato Institute has released a fiscal report card rating the state governors on their taxing and spending records.

Total state and local government spending increased every year in this tough economy before holding even in 2012. Of course, pro-taxers argue that state spending has increased as Medicaid and pensions have demanded more revenue. What those pro-taxers do not point out is that state general revenue spending has grown a brisk 46 percent since 2000.

To finance their spending spree, some in the states and in Washington, D.C., have turned to supporting the deceptively named Main Street Fairness Act, a move to eliminate the physical nexus requirement for sales taxes, replacing it with an ephemeral, so-called economic nexus standard. That effort could force tax collection for no other reason than a company Web site is seen by a person in a state. Physical nexus, by contrast, requires that an entity must have a real physical connection to the state before the state can force the entity to collect sales tax.

Governor Haslam of Tennessee, for example, has signaled his support. After his first year in office when he wildly increased spending by 14 percent, it is easy to see why he is looking to tax anything he can to pay his way out of his mess. He scored a mere 43 out of 100 on Cato’s fiscal report card.

Having already increased hospital taxes to offset the slightly decreased state sales tax and reduction of the death tax, he has few places left to turn. Following a long tradition of aggressive tax behavior in Tennessee, he now argues for a radical expansion of government taxing power by supporting legislation to eliminate the physical nexus test.

But physical nexus is critical in the Internet age because it prevents a state government from expanding its power beyond its physical borders. Choosing economic nexus would be to accept state government power as limitless as the Internet, taxing businesses anywhere—states looting citizens of other states.

The U.S. Constitution was written, in part, in response to and as a solution for this exact problem, which developed under the Articles of Confederation—states taxing without representation. These concerns are obviously still as valid today as they were in 1789.

Local news has reported that Governor Haslam was “surprised” at hearing his failing fiscal grade and immediately came back arguing that his tax increases were for the kids. When a politician uses kids as defense, grab your liberties and your wallet, as you are about to lose at least one. In this case, in the Main Street Fairness Act, politicians have found a way to take both.